With talk of a possible double-dip recession becoming more common, inflation may not be on your radar. However, over the long term, prices do tend to go up — and the purchasing power of your dollar tends to go down. It’s the way of things with a fiat currency: Over time, your purchasing power is going to decline, and you’ll need more dollars to pay for the same product or service. Just take a look at this historic inflation calculator for an example of how the purchasing power of the dollar has eroded over time. What you need are some core strategies to beat inflation and protect the purchasing power of your wealth.
How to Beat Inflation
If you are wondering how you can offset the inevitability of inflation, here are 6 strategies you might employ:
This is one of the simplest — and possibly the safest — strategies for offsetting inflation. Treasury Inflation Protected Securities (TIPS) are special bonds that are periodically adjusted to keep pace with inflation. While you probably won’t earn a huge return, your money will be backed by the U.S. government, and your purchasing power will be preserved. I-bonds are another inflation protected Treasury investment that can help you beat inflation. However, it is important to realize that, like all bonds, the possibility of default is still there.
2. Index Funds
Over time, past performance indicates that the stock market does not lose. (Although there is a first time for everything, and you are still at risk.) Indeed, over the long haul, the overall stock market offers inflation-beating returns. However, individual stock-picking does not provide the same potential for success. You can advantage of the power of the entire stock market with index funds and ETFs that follow the market. Fees are low, and if you wait long enough the returns should help you outpace inflation.
If you can stomach the volatility and the risk many associate with commodities, you might be able to stay ahead of inflation. People will always need commodities, so, due to that demand, commodities are inflation sensitive. Investing in them can put you ahead in the long run. You can limit some of your risk with the help of commodity ETFs.
4. Start a Business
If you are providing products and services, you can keep up with inflation by adjusting your prices as necessary. The downside, though, is that customers may not be happy with your rising prices. However, with slight adjustments when it comes time to renegotiate, it should be possible to create a revenue stream that paces inflation. This can be a boon in a world where wages from “the man” are less likely to keep up with inflation. With a little help from the Internet, you can gain the advantages of working from home, while possibly staying ahead of inflation.
5. Lock in Higher Interest Rates on Cash Accounts
While this is not something that is likely to happen anytime really soon, it is still worth keeping an eye out for higher interest rates. One of the key reasons for CD laddering is so that you can take advantage of higher rates when they come around. Keep watch over the interest trends, and when you can, lock in higher interest rates on your cash.
6. Lock in Lower Fixed Rates on Debt
If you have debt, now is the time to pay it down. You can reduce the effects of inflation later by getting fixed rates on mortgage loans and car loans. With rates as low as they are, you might consider refinancing. And, while you are about it, now is a good time to pay down high interest credit card debt, while more of your payment goes to principal.
What other ways can you think of to beat inflation?